Sarbanes-Oxley, commonly referred to as SOX, is an auditing law that was developed as result of the Enron and WorldCom fiasco. The law was developed by Congressman Sarbanes and Oxley.
In short, the law requires that large public companies perform quarterly audits of their internal controls (self audits). Also, the CEO and CFO are required to sign-off on their companies financial statements that they are true and accurate.
The Sarbanes-Oxley Act of 2002 was put in place to reform the practices of corporations to protect against future scandals that affected Enron, Tyco, Worldcom, Adelphia, etc.
The bill passed the house 423-3, while it passed the Senate 99-0. Ron Paul was one of the only Congressmen to vote against the Bill. WHY?
"by Ron Paul, Dr. April 15, 2005
Mr. Speaker, I rise to introduce the Due Process and Economic Competitiveness Restoration Act, which repeals Section 404 of the Sarbanes-Oxley Act. Sarbanes-Oxley was rushed into law in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, by a Congress more concerned with doing something than doing the right thing. Today, American businesses, workers, and investors are suffering because Congress was so eager to appear “tough on corporate crime.” Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.
The reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs Sarbanes-Oxley imposes on businesses. According to a survey by Kron/Ferry International, Sarbanes-Oxley cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004, while a study by the law firm of Foley and Lardner found the Act increased costs associated with being a publicly held company by 130 percent.
Many of the major problems stem from section 404 of Sarbanes-Oxley, which requires Chief Executive Officers to certify the accuracy of financial statements. It also requires that outside auditors “attest to” the soundness of the internal controls used in preparing the statements– an obvious sop to auditors and accounting firms. The Public Company Accounting Oversight Board defines internal controls as “controls over all significant accounts and disclosures in the financial statements.” According to John Berlau, a Warren Brookes Fellow at the Competitive Enterprise Institute, the definition of internal controls is so broad that a CEO possibly could be found liable for not using the latest version of Windows! Financial analysts have identified Section 404 as the major reason why American corporations are hoarding cash instead of investing it in new ventures.
Journalist Robert Novak, in his column of April 7, said that, "[f]or more than a year, CEOs and CFOs have been telling me that 404 is a costly nightmare” and “ask nearly any business executive to name the biggest menace facing corporate America, and the answer is apt to be number 404…a dagger aimed at the heart of the economy.”
Compounding the damage done to the economy is the harm Sarbanes-Oxley does to constitutional liberties and due process. CEOs and CFOs can be held criminally liable, and subjected to 25 years in prison, for inadvertent errors. Laws criminalizing honest mistakes done with no intent to defraud are more typical of police states than free societies. I hope those who consider themselves civil libertarians will recognize the danger of imprisoning citizens for inadvertent mistakes, put aside any prejudice against private businesses, and join my efforts to repeal Section 404.
The US Constitution does not give the federal government authority to regulate the accounting standards of private corporations. These questions should be resolved by private contracts between a company and its shareholders, and by state and local regulations. Let me remind my colleagues who are skeptical of the ability of markets and local law enforcement to protect against fraud: the market passed judgment on Enron, in the form of declining stock prices, before Congress even held the first hearing on the matter. My colleagues also should keep in mind that certain state attorneys general have been very aggressive in prosecuting financial crimes
Section 404 of the Sarbanes-Oxley Act has raised the costs of doing business, thus causing foreign companies to withdraw from American markets and retarding economic growth. By criminalizing inadvertent mistakes and exceeding congressional authority, Section 404 also undermines the rule of law and individual liberty. I therefore urge my colleagues to cosponsor the Due Process and Economic Competitiveness Restoration Act."
Debate on Rep. Garrett’s Sarbanes-Oxley Amendment that Garrett and Rep. Adler offered today to the Investor Protection Act of 2009.
The amendment text mirrors legislation Rep. Garrett introduced earlier this year exempting small businesses from Section 404(b) of the Sarbanes-Oxley (SOX) Act of 2002. Garretts bill, the Small Business SOX Compliance Relief Act is aimed at permanently exempting small businesses (non-accelerated filers) from the burdensome reporting requirements contained within Section 404(b)of the SOX Act. Although the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the Act has had the unintended effect of creating undue—and often unbearable—burdens on small businesses, Garrett said. It is diverting valuable resources away from other legitimate business needs; creating massive and tedious documentation requirements; and discouraging the public listing of both international and domestic companies on U.S. markets. Honest companies are being punished and the U.S. economy will suffer as a result. Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization. My legislation would free small businesses from onerous regulations and allow them to return their focus and their resources to creating jobs for unemployed Americans and innovating for our economy. The Securities and Exchange Commission (SEC) has repeatedly extended the deadline for non-accelerated filers to begin providing audited assessments of their internal controls over financial reporting, an acknowledgement of continued concern about compliance costs. Although reforms were made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from September 2009 . In summarizing survey responses from businesses regarding the benefits of Section 404 compliance, the SEC wrote, [A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies. Regarding the intended decrease in compliance costs following the 2007 reforms, a George Washington University study found that the decrease in audit costs following Auditing Standard No. 5 was not statistically significant . As a result, even following the 2007 reforms, Section 404 of SOX will continue to subject small businesses to overly burdensome fees. The extra requirements of Section 404 increase costs to small companies significantly. Section 404 adds external consulting costs, including legal fees, and substantially increases the audit and attestation fees for these companies. Research by NASDAQ shows that the burden of compliance, on a percentage of revenue basis, is 11 times greater for small companies . This creates an unfair competitive advantage for larger companies. In addition to having an effect on individual businesses, SOX Section 404 may have a dramatic effect on the competitiveness of U.S. capital markets, as the high cost of compliance has the potential to cause public companies to go private, or prevent private companies from going public. Of the small companies surveyed by the SEC, 70 percent reported they had considered going private to avoid subjecting themselves to Section 404 requirements . Additionally, Section 404 requirements may cause foreign companies to delist from U.S. exchanges. Among SEC survey respondents, 77 percent of small foreign firms considered delisting. When businesses have been conducting their affairs within the confines of pre-SOX law and acting with integrity it is reflected in the trust of their shareholders and the strength of the market, said Garrett. There is a place for Federal oversight, but the weighty cost of compliance under Section 404 is slowly strangling small businesses. I believe my legislation will lessen the burden Section 404 unnecessarily imposes on U.S. small businesses, while continuing to bolster confidence in the integrity of publicly held companies.
Duration : 0:5:16
Would you like to know how Infineon Technologies AG managed to make their compliance management more efficient with ARIS? Watch ARIS TV Episode 9, the interview with Markus Dobmeyer from Infineon, who gave some helpful tips and lessons learned from their Sarbanes-Oxley project.
We met Markus Dobmeyer from Infineon at our European GRC Conference in Vienna in September and had the chance to speak with him about their SOX project. He held a presentation about the project at the conference and gave some helpful tips for efficient compliance management. During the interview he gave some more insights. For example, he explained what you should do in the preparation phase to reduce effort later. His interview partner was Martin Kling, who is responsible for the ARIS Solution for GRC at IDS Scheer.
Have fun watching the video that also shows some snapshots of the conference!
Duration : 0:7:8
Ken Starr talks about the negative effects that Sarbanes-Oxley has had on business owners in an appearance on CNBC.
Duration : 0:1:12
Sarbanes-Oxley is a law passed in 2002 in the wake of US corporate scandals. It imposes a set of requirements on US companies, mostly applicable to registered and listed US companies, including prohibitions on insider loans, more stringent independent director and independent directors on key committees (exec. comp, for instance), more stringent independent auditor requirements (and lead partner independent auditor rotation) and the implementation of internal controls and procedures as well as related certifications of the efficacy of those internal controls and procedures.
The implementation of internal controls and procedures (the so called 404) and the accompanying external certification required in the public company’s annual report (10-K) has resulted in a great deal of expense and trouble for many US companies and the implementation of 404 was delayed for over a year but is now coming into full effect.
Hello to all.
I’m currently working with the Sarbanes-Oxley Act and the national legislation for audit committees in my country, but I’m stuck with this little problem: does Sarbanes-Oxley define how many people an audit committee must have? I haven’t found anything regarding the minimum number of members or any restrictions regarding how long they’re actually allowed to remain as such.
Can someone enlighten me on this?
Thank you all in advance.
There is no law on this, but the AICPA in its Self-Evaluation toolkit suggests a minimum of three members in an audit committee. You can obtain the toolkit from the link.
I am an Accountant, recently settled down here in Australia and I have found many companies here are concerned about SOX, but I have never heard of this before. Are these regulations applicable only to Australia? Who should comply with these regulations?
SOX is the public company accounting reform and investor protection act. It was passed in response to high-profile business failures, such as Enron and WorldCom, in order to reinforce investment confidence and protect investors by improving the accuracy and reliability of corporate disclosure. It is American law but affects all subsidiaries and units worldwide. You can read all about SOX at the link.
hello, how has sarbanes oxley affected a companies ability to send an employee eligibility file to a third party? do they have to have more documentation now?
I believe you’re referring to Sarbanes-Oxley requirements with regards to options grants. I don’t know why you would send an employee eligibility file to a third party, unless you’re talking about employees who;’ve already left the company..
It is important to determine the employment status of an employee prior to granting options. Close coordination is required between Human Resources and the Equity Compensation departments.
Employment status is particularly important when an employee receives an option grant as part of the employment offer. These grants are commonly referred to as “new-hire grants.” If the Plan permits and the grant is made prior to becoming an employee, the effective date of the option and the appropriate exercise price may vary (i.e., the date of the employment offer, the date the offer was accepted, or the date employment commenced). Options granted to a non-employee (i.e., granted prior to the commencement of employment) who renders service to the company are subject to the provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” and EITF Issue No. 96–18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
Debate on Rep. Garrett’s Sarbanes-Oxley Amendment that Garrett and Rep. Adler offered today to the Investor Protection Act of 2009.
The amendment text mirrors legislation Rep. Garrett introduced earlier this year exempting small businesses from Section 404(b) of the Sarbanes-Oxley (SOX) Act of 2002. Garretts bill, the Small Business SOX Compliance Relief Act is aimed at permanently exempting small businesses (non-accelerated filers) from the burdensome reporting requirements contained within Section 404(b)of the SOX Act. Although the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the Act has had the unintended effect of creating undue—and often unbearable—burdens on small businesses, Garrett said. It is diverting valuable resources away from other legitimate business needs; creating massive and tedious documentation requirements; and discouraging the public listing of both international and domestic companies on U.S. markets. Honest companies are being punished and the U.S. economy will suffer as a result. Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization. My legislation would free small businesses from onerous regulations and allow them to return their focus and their resources to creating jobs for unemployed Americans and innovating for our economy. The Securities and Exchange Commission (SEC) has repeatedly extended the deadline for non-accelerated filers to begin providing audited assessments of their internal controls over financial reporting, an acknowledgement of continued concern about compliance costs. Although reforms were made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from September 2009 . In summarizing survey responses from businesses regarding the benefits of Section 404 compliance, the SEC wrote, [A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies. Regarding the intended decrease in compliance costs following the 2007 reforms, a George Washington University study found that the decrease in audit costs following Auditing Standard No. 5 was not statistically significant . As a result, even following the 2007 reforms, Section 404 of SOX will continue to subject small businesses to overly burdensome fees. The extra requirements of Section 404 increase costs to small companies significantly. Section 404 adds external consulting costs, including legal fees, and substantially increases the audit and attestation fees for these companies. Research by NASDAQ shows that the burden of compliance, on a percentage of revenue basis, is 11 times greater for small companies . This creates an unfair competitive advantage for larger companies. In addition to having an effect on individual businesses, SOX Section 404 may have a dramatic effect on the competitiveness of U.S. capital markets, as the high cost of compliance has the potential to cause public companies to go private, or prevent private companies from going public. Of the small companies surveyed by the SEC, 70 percent reported they had considered going private to avoid subjecting themselves to Section 404 requirements . Additionally, Section 404 requirements may cause foreign companies to delist from U.S. exchanges. Among SEC survey respondents, 77 percent of small foreign firms considered delisting. When businesses have been conducting their affairs within the confines of pre-SOX law and acting with integrity it is reflected in the trust of their shareholders and the strength of the market, said Garrett. There is a place for Federal oversight, but the weighty cost of compliance under Section 404 is slowly strangling small businesses. I believe my legislation will lessen the burden Section 404 unnecessarily imposes on U.S. small businesses, while continuing to bolster confidence in the integrity of publicly held companies.
Duration : 0:9:47